529 Plan FAQs: About 529 Plan Accounts
What is a 529 plan?
529 plans are flexible, tax-advantaged accounts designed specifically for college savings. They are offered by individual states, but you do not have to be a resident of a particular state to invest in that state's plan. When the child for whom you’re saving reaches college age, withdrawals used for qualified higher education expenses are free from federal income taxes and in many cases state taxes.
How do I choose a 529 plan?
First, there are some features that are common to all state-sponsored 529 plans including:
- Any earnings grow federal income tax deferred.
- When you withdraw money for qualified higher education expenses, those withdrawals are federal income tax free.
- You choose how the funds are used. 529 plan distributions can be used for tuition, books, room and board, and any other qualified higher education expense at most accredited colleges and universities in the U.S. and eligible foreign schools.
When choosing a 529 plan, Fidelity suggests that families consider the following:
- In-state tax benefits – such as state tax deductions.
- Investment options – most 529 plans offer a number of investment options, including age-based portfolios, which invest savings based on a beneficiary’s age and the number of years until he or she will be starting college. Some plan managers offer portfolios that consist solely of funds they manage themselves, while others offer access to portfolios managed by multiple fund companies.
- Fees and expenses – be sure to review all fees, including asset-based fees. Some plans charge additional fees for low balances, account maintenance, and for non-residence. (Note: Fidelity-managed 529 plans do not charge these additional fees.)
- Plan performance – when available, review 1-, 3-, 5-, and 10-year performance figures.
- Investment management – consider the financial services company managing the plan and the types of services the company offers.
If my state offers a tax deduction, should I just invest in my own state's plan?
Investors should first determine whether their own state’s plan offers significant tax benefits, such as a state income tax deduction. If it does, they should consider investing in that plan. However, it's possible that a state plan may offer tax incentives, but have a record of poor performance or charge high fees that could offset the tax benefits. Fidelity suggests that investors consider a range of additional factors, including a plan's investment manager, investment options, plan performance, and underlying fees and expenses when choosing a plan.
Which 529 plans does Fidelity manage?
Fidelity manages four state-sponsored 529 plans that have no residency requirements. The plans share similar features and management philosophies.
- The UNIQUE College Investing Plan offered nationally by the state of New Hampshire
- The U.Fund College Investing Plan offered by the Massachusetts Educational Financing Authority (MEFA)
- The Delaware College Investment Plan offered by the state of Delaware
- The Fidelity Arizona College Savings Plan offered by the Arizona Commission for Postsecondary Education
I have a Uniform Gifts to Minors Act or Uniform Transfers to Minors (UGMA/UTMA) account. Can I transfer those assets into a 529 plan account?
Yes, however, you must first liquidate the assets in the UGMA/UTMA account and pay any applicable taxes. Investments may be subject to fees and expenses. After liquidation, you can invest the cash in an UGMA/UTMA (Custodial) 529 plan account. An UGMA/UTMA 529 plan account will be subject to the rules for both types of accounts, including applicable UGMA/UTMA state statutes. You cannot change the beneficiary of an UGMA/UTMA 529 plan account. You may want to consult a tax professional regarding your specific tax situation.
If I have more than one child, should I have more than one account?
You will likely want separate 529 plan accounts for each child. Each 529 plan account can have only one beneficiary. Many investors choose to take advantage of the age-based portfolio strategy for their accounts, which manages the account based on the age of the child. For this reason, you may want separate accounts for children of different ages.
What are the fees and expenses?
- There is no annual account fee associated with any of the Fidelity-managed 529 plan accounts.
- There is a program management fee that covers the cost of trust administration services, such as recordkeeping, statements, and customer service.
- The program management fee, including the state fee, for the Fidelity Fund Portfolios is 0.20%.
- The program administration fee, including the state fee, for the Fidelity Index Portfolios is 0.09%.
- The program management fee, including the state fee, for the Multi-Firm Portfolios is 0.35%.
- The program management fee, including the state fee and the bank administration fee, for the Bank Deposit Portfolio is 0.05%–0.50%.
- In addition, each of the underlying mutual funds in which a portfolio’s assets are invested also charges investment management fees and other expenses. The plans do not invest in any mutual fund with a sales load. Underlying mutual fund fees vary by portfolio. Please see the respective plan enrollment Fact Kit and application for more details on fees and expenses.
I have an account in another state's 529 plan. Can I transfer my account to one of the Fidelity-managed 529 plans?
Yes, you can. This type of transfer is called a rollover. Under federal tax laws you are allowed to roll over a 529 plan account for each beneficiary once during any 12-month period. To roll over an account, download the Fidelity College Investing Plan Rollover Form (PDF) or call us at 800-544-1914. Fidelity can initiate the roll over for you.
What happens if my child doesn't go to college?
529 plans offer significant flexibility should the designated beneficiary (student) decide not to attend college. You can take out the money as a non-qualified withdrawal, but any earnings on non-qualified distributions are subject to federal income taxes at the recipient's rate as well as a 10% federal penalty. You can also change the beneficiary on your 529 plan account to eligible family members of the original beneficiary without incurring federal income taxes and the 10% federal penalty.
A family member is a person who has one of the following relationships with the original beneficiary: (1) son or daughter; (2) stepson or stepdaughter; (3) brother, sister, stepbrother, or stepsister; (4) father, mother, or an ancestor of either; (5) stepfather or stepmother; (6) son or daughter of a brother or sister; (7) brother or sister of a father or mother; (8) son or daughter-in-law, father or mother-in-law, brother or sister-in-law; (9) spouses of the individuals listed in (1)–(8) or the spouse of the beneficiary; and (10) any first cousin.
I remember hearing that the tax-free status of 529 plans would be ending soon. Is that true?
The Pension Protection Act of 2006 permanently extended the federal tax-free status for qualified withdrawals from 529 college savings plans, which were previously set to expire in 2010. This means that any contributions made to 529 plans in the past and any contributions made in the future will grow federal income tax deferred, and distributions for qualified higher education expenses will be free from federal income taxes.